Company failure prediction in the Maltese context : Wilcox Gambler's Ruin Prediction Model versus conventional ratios

Abstract

The main objective of this study is to assess the local applicability of the Wilcox failure prediction models when compared to the results of the selected ratios.

The results of the Wilcox failure prediction models were compared with the results obtained by four selected financial ratios. Modifications to the models were carried out by the author to try and obtain better results.

The Wilcox net liquidation value approach performs better than the four ratios examined. In fact it achieved a predictive power of 92% as compared to the highest predictive percentage of 85% obtained by the profitability ratio. On the other hand, all four ratios examined perform much better than the Wilcox Gambler's Ruin Model when classifying non-failed firms for the sample selected.

The Wilcox Net Liquidation Value and the Wilcox Gambler's Ruin Model both predicted failure better than the financial ratios examined, equally obtaining a predictive power of 92% for the sample selected. However, both models resulted in a low correct classification percentage when non-failed firms were analysed.

For the first time locally this study was able to assess the effectiveness of both the Wilcox Gambler's Ruin Model and the Wilcox Net Liquidation Value Approach within the limitations of the sample used.